December 10, 2009

Relax; it’s only a business cycle

  • Times are tough, but they’ve been tougher in the past.
    Wallace Properties


    To paraphrase an old country Western, “If it weren’t for bad news, there’d be no news at all.” Could be the American media’s theme song. We’re pre-occupied with economic news, and most of it’s gloom and doom.

    The media aren’t alone. My favorite economist, Lynn Michaelis, says the economy is so bad that when he went to buy a toaster, they gave him a house. Someone else opined that the difference between a pigeon and a developer is that the pigeon can still afford to make a deposit on a Ferrari.

    Yes, we’re sobering up after a period of excessive exuberance, but let’s get serious — the glass isn’t empty, it’s more than half full. In order to appreciate that, we need to take stock of where we are.

    The recession has hit with a vengeance, and I don’t mean to minimize its impact. The stock market went in the tank, and any “properly diversified” portfolio lost half its value. Credit markets shriveled, with the conduit (commercial mortgage-backed securities), consumer credit and bond markets virtually shut down. The resultant impacts on housing, retail and commercial activity have been devastating.

    We’re still at war. Half the world wants to kill us and the other half doesn’t like us very much. We have the least experienced administration and the least business-friendly Congress in recent memory. We’re amassing trillion-dollar deficits with spending that has little to do with real economic stimulus. Closer to home, Washington has a $10 billion-plus state deficit (worse per capita than California’s), yet our geniuses in Olympia continue to put forth bills which only increase spending, regulation or both.

    The result of all this has been a precipitous drop in consumer confidence. This results in less spending, which results in more layoffs, which results in less spending, which results in lower confidence. It’s what economists refer to as a “virtuous” (oxymoronic?) cycle. The impact on commercial real estate has been direct, albeit a bit more gradual thanks to term leases, term loans and the fact that we don’t “mark to market.”

    OK, these are tough times. But, we’ve had tougher times in the past and survived. In 1971, Boeing employment dropped from 103,000 to 35,000 almost overnight. In the 1980s “Thrift Crisis,” there was no money (equity or debt), horrendous over-building and 14 percent unemployment. When the tech bubble burst in the 1990s, unemployment skyrocketed and fortunes were lost. So, this isn’t the first time Seattle has been in the tank, and it won’t be the last.

    I don’t want to be a Pollyanna, but there are certainly reasons for hope. The stock market has made a remarkable comeback, credit markets are thawing, and it’s likely that one of these days banks will figure out that in order to make money they need to lend some.

    In the Puget Sound region, we have high worker productivity (second in the nation). We have a highly paid workforce, 94 percent of whom are still working and earning record salaries. We are forecast to experience record employment and population growth over the next couple decades (assuming the machinists’ union doesn’t kill the golden goose).

    Unlike in previous recessions, there is plenty of cash. Billions of dollars of investment capital are in the pockets of Seattle investors — dollars seeking a sensible investment opportunity. Most banks are well capitalized and eager to lend on worthy projects at interest rates only dreamed of in past down cycles. We are truly poised for a strong rebound once the fundamentals stabilize and confidence returns.

    There are great industries in this region — aerospace, research, philanthropy, software, education, services, health care and more. All are industries of the future that other communities would kill for. We have clean government, a terrific environment, tolerable climate and an educated, hospitable populace. All this is conducive to continued growth, the key to our future prosperity.

    Bottom line? The economy sucks. But, it will recover and so will we.

    Robert Wallace is CEO of Wallace Properties, a CBA board member, and past chairman of WSCAR. He serves on the boards of Premera Blue Cross, Puget Sound Bank and the Puget Sound Blood Center.

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